Results analysis: Ashoka India Equity

• Today Ashoka India Equity (AIE) released its interim results for the period ending 31 December 2020. Over the six-months, the trust delivered NAV total returns of 28.6%, while the share price rose 39.1%. This compares favourably relative to the benchmark MSCI India IMI index, which returned 27.1%. 
• Performance was largely driven by stock selection, demonstrating the manager’s alpha generating capacity and the benefits of a large, ‘on the ground’ investment team. The biggest contributions came from two information technology companies, Infosys and Coforge. The strong returns from mid-cap company Coforge illustrates the benefits of the trust’s flexible investment mandate, offering growth from areas inaccessible to other managers. 
• The manager believes that Prime Minister Modi’s reforms are starting to bear fruit and the recent budget is likely to provide further tailwinds. In fact, the investment manager’s report stated: “This should go down as perhaps one of the best budgets from the Government, which reaffirms growth orientation and furthers the Prime Minister's goal of promoting ease of doing business in India.”

Kepler View

Since the removal of lockdowns across India, the short term economic and market performance has surprised analysts on the upside, resulting in a number of upward revisions to growth estimates. Year to date, the benchmark MSCI India IMI index is up 8.5% to 5 March 2021, in comparison to 1.7%, 1.5% and 3.3% from the MSCI World, S&P 500 and FTSE All-Share. Aiding this has been the promising start to the vaccination process. Serum Institute of India - the world's largest vaccine manufacturing company – already has over 100 million doses stockpiled and has the capacity to produce a similar number every month. Vaccinations started in January and the team expect the majority of the population in India to be vaccinated by the end of 2021.

Alongside an improving short-term outlook, the government has pushed through landmark reforms in agriculture and labour markets, as well as a ‘bold’ incentive to make India the manufacturing hub of the world. The recent budget announcement in February also demonstrated the country’s ‘pro-growth mindset’ and included a road map for improving the ease of doing business. In the post pandemic world, where global companies are looking to diversify their supply chains away from China, the managers think these new initiatives put India in a strong position to capture market share.

The White Oak team are looking to capitalise on these short and long-term tailwinds but remain true to their clear and well-defined processes, which revolve around identifying strong companies at the right valuations, using a proprietary cash flow valuation metric. They are boosted by the extensive resources at their disposal, including as many as ten analysts working on the ground in India - something which we see as a vital contributor to the exceptional history of alpha generation and allows the team to delve into the small and mid-cap space. This team is incentivised by an unusual performance fee-only charging structure. There is no management fee payable unless the trust outperforms the benchmark over a three year period. This performance fee is worth 30% of the outperformance, paid in shares, and is mostly locked up for three years. We believe this provides a strong incentive to generate consistent long-term outperformance.

Since it launched in July 2018 AIE has been the standout performer in the Indian sector. AIE has delivered NAV total returns of 44.7% compared to an average return of 9.15% for the other India specialist trusts, according to Morningstar. These numbers are all net of the performance fees accrued, which are reflected in the accounts.  After such a strong run, these fees are substantial, but we believe paying for quality makes sense; we note investors have been significantly better off if they invested in the ‘expensive’ AIE rather than its ‘cheaper’ peers.

Whilst India has lagged the MSCI Emerging Markets Index in recent years, in our view it remains an attractive place to invest for the long term. It is worth noting that investors who use emerging market funds to access the region are unlikely to have significant exposure, given the area makes up just 9% of the MSCI Emerging Markets index. Currently AIE is trading at a discount of 0.9%, although it has not been uncommon for the trust to trade at a premium since inception. The board have been using any premium opportunity to grow the trust through share issuance, and we have seen the market cap grow from £46m to the current size of £112m as of 5 March 2021.

Read our detailed research about the trust here